Thomas G. Heintzman and Construction Law Canadahttp://www.constructionlawcanada.com
Construction Law and Arbitration in CanadaSun, 12 Jul 2015 21:36:04 +0000en-UShourly1http://wordpress.org/?v=4.0.6Review Of Arbitral Awards: Where Is Sattva Taking Us?http://www.constructionlawcanada.com/arbitration/review-of-arbitral-awards-where-is-sattva-taking-us/
http://www.constructionlawcanada.com/arbitration/review-of-arbitral-awards-where-is-sattva-taking-us/#commentsSun, 12 Jul 2015 21:34:50 +0000http://www.constructionlawcanada.com/?p=1717The decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 (Sattva) is a seminal decision in the review of arbitral awards. That decision apparently set a wide net of protection around arbitral awards. It did so by ruling that an arbitral award interpreting a contract should usually be considered to be based upon mixed fact and law. Accordingly, such an arbitral decision may not be appealed if the only ground of appeal is an error of law. Moreover, if the decision is otherwise reviewable by the court, then the standard of review is reasonableness, not correctness. However, the Supreme Court said that, if a separate issue of law can be discerned in the arbitral award, then the decision can be reviewed on a standard of correctness. The Sattvadecision has been reviewed in my previous article dated August 10, 2014.

The Sattva decision was recently applied by the British Columbia Court of Appeal in Teal Cedar Products Ltd. v. British Columbia. TheTeal decision is important because the two decisions inSattva and Teal both arose from appeals from decisions of the British Columbia Court of Appeal. TheTeal case was sent back by the Supreme Court of Canada to the B.C. Court of Appeal to be re-considered in light of the Sattva decision.

The Background To The Teal Decision

The Teal decision was reviewed by me in an article dated December 1, 2013 relating to an earlier decision of the Supreme Court of Canada relating to the award of compound interest.

Teal had been issued timber licenses by the province of British Columbia under the B.C. Forest Act. By ministerial order, Teal’s allowable annual cut and cut areas were reduced. Teal was entitled to compensation and its claim was submitted by the parties to arbitration. That claim included a claim for interest. In the original decision of the B.C. Court of Appeal, the majority of that court held that the arbitrator had mis-interpreted the statutory provisions applicable to Teal’s substantive claim and the provisions relating to interest. That decision was appealed to the Supreme Court of Canada. In light of its decision inSattva, the Supreme Court ordered that the appeal in Teal v. B.C. be re-heard by the B.C. Court of Appeal.

Second Teal Decision

The B.C. Court of Appeal noted that Sattva involved an arbitrator’s interpretation of a contract, not a statute. The court said that, according to Sattva, an arbitrator’s decision interpreting a statute should be reviewed on a standard of reasonableness when “the error of law is within the expertise of the arbitral tribunal and is not a question of law of central importance to the legal system as a whole.” Teal argued that the decision of the arbitrator in the present case fell into neither exception and that therefore the arbitrator’s decision should be given deference and only set aside if it was unreasonable.

The B.C. Court of Appeal disagreed. It said:

“None of the criteria that might justify the deference associated with the reasonableness standard of review in respect of statutory interpretation is present here. Specifically, it is not suggested the arbitrator had any specialized expertise in forest legislation or forestry tenures and it certainly could not be said the Act was his “home” statute. Although the parties chose the arbitrator (the Court is not privy to the reasons for his selection), it is significant that arbitration was statutorily required (Act, s. 6(6)). As the Province says, the statutory interpretation question that arose — the meaning of compensation in s. 6(4) — was an issue of importance to compensation statutes generally, and arose for the first time under the Act in this arbitration. We agree with the Province these factors point to a standard of correctness…”

Furthermore, the B.C. Court of Appeal aid:

“In any event, Sattva did not explicitly restrict, or provide an exhaustive list of, the exceptional circumstances in which an arbitrator’s award based on a question of law would be reviewable on a standard of correctness. The Court was providing examples that cannot be read as excluding the interpretation of a statute.”

In the result, the court held that the interpretation of the Forestry Act was a question of law to which a correctness standard applied. Since the arbitrator’s interpretation of the Act was not correct, it was properly set aside in the prior decision.

In any event, the court held that the arbitrator’s decision was unreasonable and should be set aside under the unreasonableness test. According to the court, the arbitrator’s decision “provides for a substantial publicly financed windfall, which would serve no purpose”. The arbitrator’s award was based upon “the depreciated replacement value of all of the improvements made to Crown land in the affected areas of each of Teal’s three tenures” while the proper interpretation of the Act only provided compensation for the holder’s “actual financial loss.”

In determining what a “reasonable” decision of an arbitrator is, the B.C. Court of Appeal adopted its prior decision in British Columbia Hydro and Power Authority v. British Columbia (Workers’ Compensation Board), 2014 BCCA 353, in which it had given the following meaning to the word “reasonable”:

“A reasonable decision must be both factually and legally defensible. Where the legal issue under examination is one of statutory interpretation, the common objective of both administrative decision makers and courts must be to ascertain the intent of the legislature by applying the “modern principle” of statutory interpretation. This requires an examination of the words of the provision under consideration according to their grammatical and ordinary sense, in their entire context, and in harmony with the scheme and object of the Act. The fact that the choice between reasonable interpretations falls to the administrative decision maker does not absolve it from following this cardinal principle…”.

Since the Forestry Act provided for “compensation”, the arbitrator’s award of an amount which was “in no way linked to Teal’s actual financial loss” was not consistent with this principle and was therefore unreasonable.

The B.C. Court of Appeal then turned to the question of whether its prior decision dealing with interest should be upheld in light of the Sattva decision. The arbitrator had allowed interest despite a clause in the arbitration agreement that the Province submitted precluded interest. The Chambers judge had held that the arbitrator’s interpretation of the contract was based upon a consideration of the surrounding circumstances, and therefore amounted to a question of mixed fact and law, not a question of law. Since the arbitration statute in British Columbia only permits an appeal on a question of law, there was no right of appeal.

In its prior decision, the B.C. Court of Appeal had held that the decision of the arbitrator raised a pure question of law. It had held that the arbitrator’s decision had changed the plain meaning of the arbitration agreement, which precluded the award of interest, and that decision therefore amounted to an error law. Accordingly, the court had set aside the arbitrator’s decision.

In its present decision, the B.C. Court of Appeal held that nothing in Sattvarequired its prior decision to be changed, for three reasons:

In Sattva, the Supreme Court had adopted the B. C court of Appeal’s approach to identifying a question of law. The B. Court of Appeal said:

“It seems clear that what the Court did in Sattva was to largely endorse the approach to ascertaining what constitutes a question of law and of mixed fact and law in contractual interpretation that has in recent years been taken by some courts as reflected in the authority cited which includes the Hayes Forest Services and Otter Bay decisions of this Court. As indicated, that is the authority upon which the reasons given for the majority [in the previous Teal decision] are predicated in determining that the arbitrator’s interpretation of the Settlement Framework Agreement and Addendum #2 raise a question of law.”

In other words, the B.C. Court of Appeal held that the Supreme Court in Sattva endorsed the B.C. Court of Appeal’s approach to identifying discrete point of law in an arbitrator’s decision, thereby entitling a reviewing court to review the decision based upon an error of law.

In Sattva, the Supreme Court had not suggested or found that an error of law cannot be found in an arbitrator’s decision just because the arbitrator had regard to the surrounding circumstance. The B.C. Court of Appeal said:

“To the contrary, it is because contractual interpretation is an exercise in applying legal principles to the express language of an agreement considered in the circumstances that questions of law can arise.”

Accordingly, the B.C. Court of Appeal held that in its prior decision it had been correct in identifying a question of law even though the arbitrator’s interpretation of the agreement was based upon the surrounding circumstances.

In Sattva, the Supreme Court had reiterated that the extraneous circumstances cannot over-ride the plain meaning of the contract. That is the principle that the B.C. Court of Appeal had applied in its prior decision.

Accordingly, the B.C. Court of Appeal upheld its prior decision setting aside the arbitrator’s award of interest on the ground that that decision was contrary to the plain meaning of the Settlement Framework Agreement.

Discussion

The initial impression of Sattvawas that it would substantially reduce the scope of review of arbitral decisions because the Supreme Court held that the interpretation of an agreement is normally a matter of mixed fact and law. Many arbitration statues only permit appeals on a question of law, not mixed fact and law. Accordingly, it was thought that Sattvahad substantially eliminated appeals from arbitral decisions interpreting agreements.

This decision of the B.C. Court of Appeal in Teal v. B.C. may lead to the opposite conclusion for numerous reasons:

The B.C. Court of Appeal has confirmed that Sattva has opened wide the evidence that must be considered in interpreting a contract. Now, the surrounding circumstances may and should be considered in interpreting the contract. While those circumstances cannot “overwhelm” the plain meaning, they may be considered, and once considered it is obvious that there is a wider basis for controversy or dispute, and uncertainty, about the real meaning of the contract.

The B.C. Court of Appeal has held that if the arbitrator is considering a statute, then the standard of review is correctness, not reasonableness. So now there are two different standards of review, one for contracts and one for statutes.

The B.C. Court of Appeal has adopted a very strict test of “reasonableness”. The test appears to adopt almost all the ingredients of the correctness test. It is hard to imagine an interpretation of a statute that, under its test, will be found to be an incorrect but reasonable interpretation.

Even though the arbitrator has considered the surrounding facts, that does not preclude the court from finding or identifying an error of law. It is not the arbitrator’s process that is important. It is not a question of whether the arbitrator found or operated upon a principle of law that is incorrect. Rather, it is a question of whether the court can identify in, or distill from, the arbitral decision an error of law. If it can, then that decision may be set aside. Indeed, the B.C. Court of Appeal found that in Sattva, the Supreme Court had approbated its prior approach in identifying errors of law in arbitral decisions.

The B.C. Court of Appeal has said that the decision in Sattva does not provide an “exhaustive list” of those circumstances in which an arbitral award may be reviewed on the basis of correctness. This means that courts may find other grounds for applying the correctness standard.

When all these ingredients are added up, the principles applied by the B.C. Court of Appeal seems to be very much the same as those which courts have historically applied in reviewing arbitral decisions. So perhaps, plus ca change….

]]>http://www.constructionlawcanada.com/arbitration/review-of-arbitral-awards-where-is-sattva-taking-us/feed/0Can A Change To A Construction Contract Be Set Aside For Duress Or Coercion?http://www.constructionlawcanada.com/building-contracts/can-a-change-to-a-construction-contract-be-set-aside-for-duress-or-coercion-2/
http://www.constructionlawcanada.com/building-contracts/can-a-change-to-a-construction-contract-be-set-aside-for-duress-or-coercion-2/#commentsTue, 23 Jun 2015 15:08:48 +0000http://www.constructionlawcanada.com/?p=1713Building projects often give rise to heated discussions. When a change order is made in that sort of situation, can one party later say that the change order was made under duress or coercion? The Newfoundland Court of Appeal said Yes in the recent decision in Hickey’s Building Supplies Ltd. v. Sheppard.

Background Facts

This decision was reviewed in the last article June 7, 2015. To refresh our memories the facts were as follows:

Mr. and Mrs. Sheppard hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements. The construction of the home was more than a year late. When constructed, the flooring was not level and there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard.

One of the issues in the case was whether the Sheppards had agreed to a change in the height of the ceiling from 9 feet to 8 feet. The contractor said that he had discussed the height of the ceiling with Mr. Sheppard who had agreed to the lower ceiling. The contractor submitted that the Sheppards had waived any requirement of 9-foot ceilings.

Mr. Sheppard said that when he met with the contractor, the meeting degenerated into shouting. Mr. Sheppard said that he agreed to the 8-foot ceilings because he could not countenance any further delays in the project. Mrs. Sheppard said that the contractor was adamant that “we’re not getting nine foot walls.”

Decision of the Court of Appeal

The Court of Appeal adopted the following definition of waiver:

“waiver…arises where one party to a contract, with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal.”

The court then adopted the following test as to whether waiver had occurred:

“…a finding of economic duress is dependent initially on two conditions precedent:

(i) the contractual variation must be extracted by pressure in the form of a demand or threat;

(ii) the exercise of pressure must be such that the coerced party has no practical alternative but to comply with the demand or threat.

If these two conditions are met, the focus shifts to whether the party consented to the contract variation. The factors to be considered are (i) whether the promise was supported by consideration (ii) whether the coerced party protested the variation or executed it on a “without prejudice” basis and (iii) [if not,] whether the coerced party took steps to disavow the variation on a timely basis.”

Based on this test, the court concluded that:

“the evidence regarding the heated discussion between Mr. Sheppard and the Contractor leads to the conclusion that there was a demand amounting to pressure on Mr. Sheppard to agree to the eight-foot rather than nine-foot walls. In the circumstances, the Sheppards had no practical alternative but to accept this change. The change was not supported by any consideration from the Contractor. Finally, the Sheppards vehemently protested the variation.”

The Court of Appeal accordingly upheld the trial judge’s conclusion that the contractual requirement for 9-foot ceilings had not been waived by the owners.

Discussion

Parties to a building contract should remember that the negotiation for changes to some building contracts may be a fragile exercise, at least in some circumstances. One of the parties to the contract may be under a financial, emotional, physical or other handicap or impairment. That party may be the owner, but it also may be a supplier or subcontractor which is in a position of financial vulnerability. If that party has no real option but to acquiesce in the demand for a change in the contract, and if there is no consideration for that change, then the conduct of the party demanding the change may be later seen as over-bearing and coercive. If it is, then that conduct may be set aside and the change order, or waiver of the original contract, may be nullified.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 8, section 7(b)(ii)

]]>http://www.constructionlawcanada.com/building-contracts/can-a-change-to-a-construction-contract-be-set-aside-for-duress-or-coercion-2/feed/0Can General Damages Be Awarded For The Breach Of A Building Contract?http://www.constructionlawcanada.com/building-contracts/can-general-damages-be-awarded-for-the-breach-of-a-building-contract/
http://www.constructionlawcanada.com/building-contracts/can-general-damages-be-awarded-for-the-breach-of-a-building-contract/#commentsSun, 14 Jun 2015 12:43:09 +0000http://www.constructionlawcanada.com/?p=1705Generally speaking, damages for a non-financial loss are not awarded for the breach of a business contract. That is because those sorts of damages are not foreseeable. The breach of a business contract may give rise to anxiety and distress, but that result is usually thought of as part of the vicissitudes and rough and tumble of commerce.

But, according to the Supreme Court of Canada’s decision in Fidler v. Sun Life Assurance Co. of Canada [2006] 2 S.C.R. 3, non-financial losses for mental distress can be awarded in certain circumstances. . The court acknowledged that “a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration.” However, the court said that it “is otherwise….when the parties enter into a contract, an object of which is to secure a particular psychological benefit.” Accordingly, general damages for breach of contract may be awarded if that sort of damage was “in the reasonable contemplation of the parties at the time the contract was made,” and that will be the case if

(1) an object of the breached contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and

(2) the resulting degree of mental suffering was of a degree sufficient to warrant compensation.

Can a building contract satisfy those conditions and give rise to damages for mental distress? According to the recent majority decision of the Newfoundland Court of Appeal in Hickey’s Building Supplies Ltd. v. Sheppard, the answer to that question is Yes.

Background

Mr. and Mrs. Sheppard lived in Labrador City. They hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements.

The construction of the home was more than a year late. When constructed, the flooring was not level and did not adhere to the under padding. Most importantly, there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. Hickey’s installed transition strips at this juncture but those strips interfered with Mrs. Sheppard’s wheel chair being able to run from one room to the other, causing the wheel chair to “bring up solid” against the transition strips. In addition, the strips cracked and splintered and the floorboards popped up from the floor. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard. The Sheppards counterclaimed against Hickey’s for general damages for mental distress as a result of these deficiencies.

The Courts’ Decisions

The trial judge awarded the Sheppards $15,000 non-pecuniary damages for mental distress. The trial judge held that the Sheppards had met the test in Fidler. The Newfoundland and Labrador Court of Appeal was divided on the issue. The majority agreed with the trial judge and upheld the general damage award. The dissenting judge held that the Fidler test had not been met and would have dismissed the claim for general damages.

The central issue was whether the contract contained a “peace of mind” component. The dissenting judge said No:

“Regardless of the Sheppards’ special circumstances with respect to wheelchair accessibility, the contract to build their house did not engage the “peace of mind” component that would ground the necessary foreseeability criterion related to securing a psychological benefit as referenced in Fidler. It is true that the hardwood flooring was not properly installed and that the Contractor chose to comply with National Building Code standards in using transition strips. However, these deficiencies could be corrected and damages awarded to address the required remediation. This was not a situation in which the house was rendered uninhabitable.

The majority came to the opposite conclusion:

“…Hickey’s concedes in its factum that the contract can fairly be characterized as a “peace of mind” contract, and does not allege that the trial judge made any factual or legal errors relating to foreseeability. Hickey’s “had actual knowledge of the plaintiff’s particular sensibilities”…

It is inherent in a home construction contract that the finished flooring will be hazard-free. The flooring Hickey’s delivered was far from hazard-free. Foreseeable mental distress may ensue for any home purchaser who did not receive this basic contractual promise, but is particularly foreseeable that mental distress would ensue in this case.

Accordingly, it was within the contemplation of the parties that the purpose of the contract was to provide the Sheppards, in a timely fashion, with a safe retirement home accommodating Mrs. Sheppard’s needs. Hickey’s did not deliver what they promised with respect to the flooring and delay in completion. It was therefore foreseeable that these breaches of the contract between the Sheppards and Hickey’s would cause mental distress to the Sheppards. Given the foreseeability of their mental distress, damages for it are recoverable if they are sufficient to warrant compensation.”

The court also concluded that the Shepards’ mental distress was “more than the ordinary annoyance, anxiety and fear arising from a bad building contract. In sum, the mental distress suffered by both Mr. and Mrs. Sheppard is serious, prolonged and far from trifling. It is sufficient to warrant compensation.”

Accordingly, the award of general damages for mental distress was upheld.

Discussion

The upshot of these decisions appears to be that contracts cannot be put into water-tight compartments so far as damages for mental distress are concerned. In each case, the nature of the contract and the circumstances of the parties to it must be examined to determine if mental distress is reasonably foreseeable.

The notion of “peace of mind” may be more suited to some contracts and to the circumstances of some parties to contracts. In some cases, perhaps, the very nature of the contract will tend to make it a “peace of mind” contract; such as a vacation contract, or disability or pension contract. Whether this decision is saying that a building contract for a home is a “peace of mind” contract depends on the way one reads this decision. Some of the language in the majority decision suggests that virtually any home building contract is for the “peace of mind” of the homeowner. The underlined words above suggest that foreseeable mental distress can arise from any improper construction of a home. On the other hand, the dissenting judge was clearly not of this view, and other language in the majority judgement suggests that it was only the particular disabilities of Mrs. Sheppard that made this building contract a “peace of mind” contract. It will be interesting to see which approach other courts in Canada follow.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., section 6(m)(i)(B).

]]>http://www.constructionlawcanada.com/building-contracts/can-general-damages-be-awarded-for-the-breach-of-a-building-contract/feed/0Quebec Court of Appeal Awards Impact Damageshttp://www.constructionlawcanada.com/building-contracts/quebec-court-of-appeal-awards-impact-damages/
http://www.constructionlawcanada.com/building-contracts/quebec-court-of-appeal-awards-impact-damages/#commentsMon, 01 Jun 2015 14:37:55 +0000http://www.constructionlawcanada.com/?p=1700When a breach of a building contract occurs, the damages can be extensive because the breach can have an impact on the performance of other parts of the contract. For this reason, a unique aspect of construction disputes is the potential award of what are called “impact” costs or damages.

In the recent decision of the Quebec Court of Appeal in Dawcolectric inc. c. Hydro-Québec, the court awarded impact damages against the owner, even though those damages had been suffered by the subcontractor. In the course of its judgment the Court of Appeal also addressed a number of other construction law issues.

Background

Hydro-Quebec contracted with a general contractor Dawco which granted a subcontract to a subcontractor Solimec which did most of the work on the project. Over 400 change orders were issued by the owner and substantial delays were encountered on the project. The general contractor brought a claim for damages against Hydro-Quebec. The trial judge found that the delays were caused 60 percent by Hydro-Quebec and 40 percent by the contractor. The trial judge found that the collective corporate conduct of Hydro-Quebec amounted to a breach of contract. The trial judge dismissed Dawco’s claim for the impact damages suffered by the subcontractor, Solimec.

Hydro-Quebec appealed on the grounds that it could only be liable for acts of its employees, and there was no such thing as a breach of contract by the corporation without a specific act of an employee amounting to a breach. The contractor appealed from the trial judge’s failure to award impact damages.

Decision of the Quebec Court of Appeal

The Court of Appeal upheld the trial judge’s finding that Hydro-Quebec had, by the collective conduct of its employees, breached the contract. It was not necessary to identify a specific breach of contract arising from an individual employee’s conduct for the court to conclude that, in totality, the owner had breached the contract.

The Court of Appeal held that the trial judge erred in failing to award Dawco the amount of impact damages that had been suffered by Solimec and included in Dawco’s claim.

First, while the contract between Dawco and Solimec was styled as an “Entente de rémunération du risqué” (or “risk reward contract”), nevertheless Solimec was a subcontractor of Dawco. Therefore, the general principle applied that the work done by Solimec was work done by Dawco for Hydro-Quebec and recoverable by Dawco under the main contract with Hydro-Quebec.

Second, the fact that the limitation period had expired for Solimec to claim those costs from Dawco was irrelevant and was not a defence for Hydro-Quebec to Dawco’s claim. The limitation period for Dawco’s claim against Hydro-Quebec had not expired when Dawco commenced its action. Therefore, Dawco could assert its claim to those costs against Hydro-Quebec, including any claim arising from the work done by Solimec.

Third, the costs in question were in fact and law “impact costs” and not “indirect costs” as contemplated by the change orders. Indirect costs are costs for items like site administration, bonding costs, water and electricity servicing costs, demobilization, etc. They are sometimes called general or project costs.

The costs in question here were the costs of: extra technical and supervisory personnel and additional equipment, over and above those that had been forecast for the work, which became necessary due to the delays and changes demanded by Hydro-Quebec. According to definitions accepted by the Court of Appeal, these costs fall within the concept of “impact costs,” being additional costs resulting from the impact of change order upon the performance of the contract. The Court of Appeal accepted that impact costs are normally the responsibility of the contractor, but they can become the responsibility of the owner when the owner by its conduct becomes liable for damages in a contractual or non-contractual claim.

When negotiating the change orders, Hydro-Quebec had insisted that the only amounts that could be included were costs directly arising from the modification of the work, and specifically excluded from the negotiations of the change orders any consideration of impact and the retarding of the project. In those circumstances, the Court of Appeal held that those costs were not included within the change orders and the change orders could not bar a claim for impact costs associated with those changes.

Accordingly, the Court of Appeal allowed Dawco’s claim for impact costs and awarded 60% of those costs to Dawco.

The Court of Appeal confirmed the trial judge’s award of 13.76% for overhead and profit. Dawco and Solimec led evidence to establish that their historic overhead and profit during the period 1999 to 2005 amounted to 13.76% of their costs. In addition, the contract itself referred to overhead and profit of 15% in another clause in the contract, which was not applicable to the present case. Hydro-Quebec pointed out that Solimec had only anticipated overhead and profit of 4.95%. Nevertheless, the court held that 13.76% was reasonable in the circumstances.

The Court of Appeal allowed in part the appeal by Hydro-Quebec. It set aside the award of additional financial costs allegedly incurred by Dawco. It held that Dawco was, after all, 40% responsible for the delays, and furthermore Dawco was by its decision receiving substantial compensation for its actual losses. After a lengthy review of the facts, the court held that Hydro-Quebec was not at fault such that Dawco’s additional financial costs should be the responsibility of Hydro-Quebec.

The Court of Appeal also allowed Hydro-Quebec’s appeal with respect to Dawco’s claim for damage to reputation, loss of the opportunity to obtain other business and other inconveniences. It pointed out that the trial judge had dismissed Dawco’s claim for punitive damages on the ground that Hydro-Quebec had not purposefully engaged in wrongful conduct. The court concluded that there was no proof of causation between these alleged losses and any wrongful conduct of Hydro-Quebec that had not already been properly compensated, and that these losses were uncertain and unforeseeable.

Discussion

This decision contains a potpourri of issues which are important for construction law. One of the most interesting is that of impact damages: what are impact damages; what sort of clause can eliminate a claim for impact damages; what sort of conduct and documentation during the issuance of change orders can eliminate a claim for impact damages, or allow it to survive?

In this case, the Court of Appeal of Quebec held that the contractor’s claim for impact damages was not excluded by the contract. Nor was that claim excluded by the change order process because the owner had specifically directed that impact costs were not to be included in the change order process. Accordingly, the claim for impact damage was allowable under the contract because they fell within a recognized category of recoverable damage, and the claim had not been nullified by the change order process.

The parties could have agreed to include impact costs in each change order, although the total impact costs arising from all change orders would have been difficult to assess when negotiating each change order. Hydro-Quebec could have taken the position that no impact costs arose from the change orders. In either case, Hydro-Quebec could have then required Dawco to sign a release for any further impact costs arising from the change order process. In those circumstances, Dawco’s claim for impact damages would not have survived. However, Dawco would presumably not have accepted that arrangement if it wished to preserve a claim for those costs, particularly one arising from the cumulative effect of change orders.

This decision shows the importance of the negotiation process and the wording of change orders to the viability of a later claim by the contractor for impact costs. Since those costs may arise from many change orders and usually cannot be determined from any single change order, the owner and contractor must be alive to the potential existence of those costs and how they are to be determined.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter, part 6(f)

]]>http://www.constructionlawcanada.com/building-contracts/quebec-court-of-appeal-awards-impact-damages/feed/0Subcontractor’s Lien Rights May Be Terminated By The Contractor’s Abandonmenthttp://www.constructionlawcanada.com/construction-and-builders-liens/subcontractors-lien-rights-may-be-terminated-by-the-contractors-abandonment/
http://www.constructionlawcanada.com/construction-and-builders-liens/subcontractors-lien-rights-may-be-terminated-by-the-contractors-abandonment/#commentsSun, 24 May 2015 14:28:55 +0000http://www.constructionlawcanada.com/?p=1696The construction and builder’s line statutes in Canada generally provide that a lien may be lost if an action is not commenced or a lien registered within a certain period of time within the “completion or abandonment” of the work. Usually, the word “abandonment” is applied to the party claiming the lien. But in Tervita Corp. v. ConCreate USL (GP) Inc., the Alberta Court of Appeal has held that the conduct of the other party to the construction contract may result in the contract being “abandoned”. In addition, the Alberta Court of Appeal held that more than one lien claim may be filed or registered for one lien. Both of these findings are significant for those engaged in construction disputes.

Background

Tervita was a subcontractor to ConCreate which had contracted with the owner. Tervita performed its last work in February 2012. In March and April 2012 a receiver was appointed for ConCreate and the receiver barred access to the site. In April 2012 Tervita filed its first lien. In July 2012, Tervita emailed the City’s consultant to say that its “contract was terminated with ConCreate prior to us being able to complete the work.” In July 2012, Tervita issued a Statement of Claim but it did not register a lis pendens against the land.

On October 2, 20121, the 180 day period for Tervita to register a lis pendens expired. On October 12, 2012, Tervita registered a second, identical lien. In November 1, 2012, a lis pendens was registered with respect to the second lien and the original Statement of Claim was amended to now refer to the second lien.

Decision of the Alberta Court of Appeal

The Alberta Court of Appeal held that the subcontract between Tervita and ConCreate was abandoned due to the conduct of ConCreate and its receiver, and that this fact was recognized by Tervita in its email of July 23, 2012 to the City’s consultant. The Court of Appeal held that the word “abandonment” includes abandonment by the party claiming the lien -in this case, Tervita – or by the general circumstances relating to the subcontract.

The Court of Appeal described the issues of subjective and objective abandonment as follows:

“In some cases a contract may be “abandoned” on an objective basis. The statute just requires abandonment, not necessarily abandonment by the lien claimant. Certainly a subjective abandonment by the lien claimant will be sufficient. However, when it becomes clear that the contract has been rendered un-performable by the conduct of either or both parties, by the actions of third parties, or as a result of external factors, the contract is essentially “abandoned”. Once it becomes impractical or impossible to perform the contract, no reasonable party would persist in saying they are “ready, willing and able” to continue performing……There comes a point in time when it is clear that the contract is at an end. That will also start the 45 days running. At some time between the date when ConCreate’s receiver posted guards and blocked access to the site, and the email of July 23, this contract was essentially abandoned.” (underlining added)

The trial judge had held that the subcontract had never been completed, that Tervita was always ready, willing and able to complete the work and that only in October 2012 did the City conclusively tell Tervita that it would not be allowed to complete the subcontract. Accordingly the trial judge held that the time to register the second lis pendens had not expired.

The Court of Appeal disagreed, finding that, by its email of July 232, 2012 Tervita had effectively admitted that the subcontract had come to an end and therefor the work was “abandoned”. It said:

“The test is when the lien claimant knew or should have known that the other party would not complete the contract. Once it would have been obvious to a reasonable contractor that the cessation of work caused by the receivership was not merely temporary, but represented a termination of the contract, the contract was effectively “abandoned”. An abandonment can occur without a formal communication from the other parties that the contract is terminated. Here the insolvency of ConCreate, the actions of its receiver in blocking access to the site, the discussion with the City about the possibility of doing the remaining work directly for the City, combined with the other surrounding factors, would cause a reasonable person to conclude that the contract was terminated. Tervita acknowledged that in its email of July 23. The fact that the City of Calgary might enter into a new contract for the same work was irrelevant to the ability to file a lien for the work done under the first contract.

….. To resolve this appeal, it is not necessary to determine exactly when the 45 days started to run. The contract had been abandoned, at the very latest, by the time of Tervita’s acknowledgment on July 23 that its contract had been terminated. In an objective sense, Tervita realized by that day that the cessation of work was not just temporary. The last day on which a lien could have been filed was approximately September 6, 2012, making the second lien ineffective.”

Notwithstanding tis finding that the time to file the second lien had expired, the Court of Appeal went on to find that the filing of a second lien is permissible. It said:

“Thus, the Act does not appear to preclude the filing of multiple liens. Since the lien right arises when the work commences, a subcontractor might theoretically file a separate lien at the end of each month, for all the work done that month and in all the previous months. If a statement of claim was subsequently issued later than 180 days after some of the early liens were filed, those liens would undoubtedly “cease to exist”. But it does not necessarily follow that all of the lien rights for early work that are also captured by later liens, or at the least those for work that is done later, would also “cease to exist”.

As noted, a liberal approach is to be taken in determining whether the claimant has lien rights. After that threshold is reached, a strict interpretation is required of the registration requirements. If it were not for the fact the second lien was filed after the passage of 45 days from the abandonment of the contract, that second lien would have been valid. The first “registered lien” had ceased to exist, but on a proper interpretation of the statute the underlying lien rights should not be taken to have been extinguished as well. If the lien claimant meets all of those requirements, a second lien that overlaps with the claims in a first lien is not per se invalid. On a proper interpretation, the expiry of the first lien does not undermine the fundamental validity of the second one.” (underlining added)

Discussion

The email from Tervita on July 232, 2012 seems to have doomed its later assertion that the subcontract had not been abandoned. But what if it had not written that email? Would its lien rights have continued for ever, since it was the contractor which precluded the subcontract from being completed? Probably not. At some point the objective facts would have established that the subcontract was abandoned even though the subcontractor wished to complete it. The Court of Appeal appears to have been willing to find that the subcontract was not abandoned by reason of the appointment of the receiver for ConCreate, as long as there was a possibility that ConCreate’s receiver would continue with the contract and the subcontractor intended to do so.

There are a number of lessons to be learned from this decision. Contractors and subcontractors should be careful to determine whether the conduct of others on the site might be construed as an abandonment of the contract or subcontract. They should be careful when they, or others on the project, make definitive statements about whether the contract is abandoned. In either event, a lien claimant is well advised to immediately take all steps to preserve and protect the lien if the conduct on the project or statements of the parties on the project might lead to the conclusion that the contract or subcontract has been abandoned. Thus, if a party sends or receives a letter stating that the contract is terminated, then there is a distinct possibility that the contract is abandoned and immediate steps should be taken to register a lien.

]]>http://www.constructionlawcanada.com/construction-and-builders-liens/subcontractors-lien-rights-may-be-terminated-by-the-contractors-abandonment/feed/0Are There Exclusive and Inclusive Definitions Of “Improvement” In The Lien Statutes?http://www.constructionlawcanada.com/building-contracts/are-there-exclusive-and-inclusive-definitions-of-improvement-in-the-lien-statutes/
http://www.constructionlawcanada.com/building-contracts/are-there-exclusive-and-inclusive-definitions-of-improvement-in-the-lien-statutes/#commentsSat, 09 May 2015 20:59:07 +0000http://www.constructionlawcanada.com/?p=1692The Saskatchewan Queen’s Bench recently considered the definition of the word “improvement” in the Builders’ Lien Act of Saskatchewan. In Propak Systems Ltd. v. Grey Owl Engineering Ltd., that court held that the lien statutes of some provinces, like British Columbia, contain “inclusive” definitions and others, like Saskatchewan’s, contain an “exclusive” definition that also requires a determination of the parties’ intention to make a permanent improvement. Applying this approach, the court held that storage tanks resting on a pad were not an improvement.

Background

Grey Owl was hired by a lessee of land to provide engineering services relating to the lands. Grey Owl hired Propak to install three storage tanks on the land. The tanks rested upon a pad. Propak was not paid and filed a lien. The question in the lawsuit was whether the tanks and pad were an “improvement” to the lands which could give rise to a builders’ lien.

Decision

The court held that the tanks and pad were not an improvement. However, it is the logic by which that result was reached that is interesting. The application judge held:

The application judge held that at the “heart” of the issue was the following question: Is the statutory definition of “improvement” expansive in its meaning or exhaustive and restrictive?

The judge reviewed the lien statutes across Canada and concluded as follows:

“Courts have previously drawn a distinction between legislation that is “broad and inclusive” in its definition, and legislation that is “exhaustive and restrictive”. The British Columbia legislation, which the respondent seeks to rely on, has been characterized as inclusive, and thus, courts are more inclined to rule that the structures are improvements. In contrast, the legislation in Alberta, Ontario and New Brunswick has been characterized as exhaustive.”

The judge then concluded that the definition of “improvement” in the Saskatchewan Act is a restrictive and exclusive definition:

“British Columbia is the only province whose legislation does not include a specific exception to the definition. In this sense, it is much more broad and inclusive than other provinces, and the courts have accordingly held that broader instances of claims fall within the section. The Saskatchewan legislation does not share this feature. Although it may be more inclusive in terms of listing certain features that should be considered improvements, it also does contain an express exception for things that are “not affixed to the land or intended to become part of the land”. This feature is very similar to the legislative definitions found in the other proposed provinces which have been defined as exhaustive and restrictive….. It therefore appears to me that the inclusion of this exception in the Saskatchewan legislation strongly suggests that the definition is not broad and inclusive as suggested by the respondent.”

The application judge also held that some lien statutes introduce an element of intention into the definition of “improvement”, particularly if the statute is of the “exclusive” type, while other provincial statutes do not. He said:

“Another distinction between the jurisdictions is the level of analysis devoted to the intention of the parties when determining whether something is an improvement. As the British Columbia legislation makes no provision for this in the wording of the statute, the courts have tended to base determinations of whether something in (sic) an improvement on the extent of affixation and duration of the object…Therefore, having determined that the Saskatchewan legislation is exhaustive, it must be determined whether the parties intended for the tanks to become affixed to the land or become part of the land.”

The judge then addressed the nature of the evidence relating to intention:

“[R]esort to prior case law seems to indicate that the threshold regarding ability to relocate the object is low. The threshold seems to be that as long as the object is capable of being moved, it indicates intention not to be affixed…..It is my view that based on the foregoing evidence in the matter at hand and in consideration of the related case law, the tanks were not intended to be permanently affixed and become an improvement, and I so find.”

The application judge then concluded as follows:

“The Saskatchewan legislation can most likely be characterized as “exhaustive” within the meaning of the case law. It expressly contains an exception to the definition of “improvement” and directs the Court to examine the intention of the parties in determining each matter. In order to determine whether the tanks in the matter at hand are improvements and, thus, be a thing capable of maintaining a builders’ lien, the Court must examine the intentions of the parties, including the degree of affixation and the ability of the tanks to be moved. Upon considering all of the material before me in this context, I have concluded that the tanks are not improvements within the meaning of the Act.” (underlining added)

Comments

The application judge has drawn a distinction between provincial lien statutes which are “inclusive” and those which are “exclusive”, and between lien statutes which are intention-based and those which are not. However, one has to question whether these distinctions are real or helpful. Virtually all of the definitions in the provincial lien statutes use the words “included” or “including”; certainly the B.C., Saskatchewan, New Brunswick and Ontario statutes quoted by the judge do so, albeit in different locations in the definition. Only the Alberta statute does not. All of these provincial statutes also use the word “intended”. In the absence of a clear indication that each province intended to adopt a different definition, one wonders whether it would be better to approach the definition of “improvement” from a consistent standpoint across Canada.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 16, part 4(a)(ii)

]]>http://www.constructionlawcanada.com/building-contracts/are-there-exclusive-and-inclusive-definitions-of-improvement-in-the-lien-statutes/feed/0Does Construction Insurance Apply To The Suppliers To The Project?http://www.constructionlawcanada.com/building-contracts/does-construction-insurance-apply-to-the-suppliers-to-the-project/
http://www.constructionlawcanada.com/building-contracts/does-construction-insurance-apply-to-the-suppliers-to-the-project/#commentsSun, 03 May 2015 19:04:25 +0000http://www.constructionlawcanada.com/?p=1686An important issue in construction projects is the identity of the persons covered by the insurance coverage which applies to the project. If one of the parties– say the owner or the contractor – takes out the insurance, does it cover subcontractors or suppliers? Typically the courts have been reluctant to find that the project insurance covers suppliers. And in Sable Offshore Energy Inc. v. Ameron International Corp., the Nova Scotia Supreme Court recently held that the construction insurance did not cover suppliers.

Background

Ameron was a supplier to the construction project. The Lloyds’ project insurance policy taken out for the project stated as follows with respect to “additional insureds”:

“Any other company…. including, but not limited to, project managers, contractors, sub-contractors of any tier or with whom the Insured(s) in (a), (b), or this paragraph (c) have issued a Letter of Intent or with whom the Insured(s) have entered into written agreement(s) or contract(s) in connection with the subject matters of Insurance, and/or any works, activities, preparations connected therewith which are included in the Insured values hereunder.

Also to include vendors and suppliers, in respect of contracts solely for supply of raw materials, but only in respect of physical loss or physical damage as may be covered under Section1 of policy wording relating to cargo transits covered hereunder.”

Ameron argued that as a supplier it had “entered into a written agreement or contract” with the insureds and therefore was an additional insured.

Decision

The application judge disagreed, for three reasons:

First, that submission would render the second part of the Additional Insured provision redundant: all suppliers would be covered by the first paragraph. Accordingly, suppliers were only entitled to the more limited insurance referred to in the second paragraph.

Second, a review of the decided cases led the application judge to the view that suppliers are not generally covered by project-related construction insurance policies. The court said:

“The purpose of project insurance in cases such as these is to provide coverage to those who work on the project. In my view, vendors and suppliers are not in the same position. They do not work on the project and are not participants in the construction of the project. This is recognized, I conclude, in the decisions to which I have just referred.”

Third, the background facts persuaded the application judge that suppliers were not intended to be covered by the facts. In addition, the contra proferentem rule was not useful since that rule has a “limited role” and was not applicable when the parties had actually negotiated the provision and when there was no ambiguity in the clause. In any event, Ameron was a stranger to the insurance contract and had no standing to apply the rule.

Commentary

This decision underlines how important it is to negotiate project insurance that each parties wants. This is especially so in the case of suppliers. The court will be reluctant to hold that project insurance is intended to cover suppliers unless that coverage is clear. If a supplier wants to be included within the insurance umbrella, it should ensure that that coverage is explicit.

The finding that Ameron did not have standing to submit that the contra proferentem rule applied seems rather odd. That rule is a rule of construction of contracts. It is used to interpret the contract whoever is relying on it. In particular, if it applies, then it applies against the person who prepared the contract, in this case the insurer. There does not seem to be a good reason why any party relying upon the contract should be precluded from relying upon that rule against the insurer, if the provision in question is ambiguous and the rule is otherwise applicable.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.) at chapter 14, part 3

]]>http://www.constructionlawcanada.com/building-contracts/does-construction-insurance-apply-to-the-suppliers-to-the-project/feed/0Is A Trustee Under Payment Bond Obliged To Advise Potential Beneficiaries Of The Existence Of The Bond?http://www.constructionlawcanada.com/building-contracts/is-a-trustee-under-payment-bond-obliged-to-advise-potential-beneficiaries-of-the-existence-of-the-bond/
http://www.constructionlawcanada.com/building-contracts/is-a-trustee-under-payment-bond-obliged-to-advise-potential-beneficiaries-of-the-existence-of-the-bond/#commentsMon, 27 Apr 2015 13:33:02 +0000http://www.constructionlawcanada.com/?p=1680The Alberta Court of Queen’s Bench recently considered an interesting issue relating to labour and material payment bonds. When a contractor requires a subcontractor to obtain such a bond, does the contractor have a duty to tell the subcontractors about the existence of the bond so that they can make a timely claim under it, particularly when the contractor is shown in the bond to be a trustee for those subcontractors? In Valard Construction Ltd. v. Bird Construction Co., the court said No. Is this the just result?

Background

Bird was the general contractor and Langford was the subcontractor on a construction project. Bird required Langford to provide a CCDC 222-2002 payment bond. Valard was an unpaid sub-sub-contractor of Langford. It was unaware of the existence of the payment bond until after the notice period in the bond had expired, and its claim was accordingly rejected by the bonding company. It submitted that Bird, as trustee under the bond, had a duty to inform it of the bond’s existence within the relevant notice period in the bond.

Decision of the Application Judge

The judge hearing the application held that the trusteeship wording in the bond was solely for the purpose of avoiding the rule in contract law that third parties cannot sue on a contract and to enable the sub-subcontractors to sue on the bond even though they were not parties to it. The trusteeship wording did not create a fiduciary duty toward Valard obliging Bird to tell Valard of the existence of the bond. The judge noted as follows:

“In order to avoid the application of the third party beneficiary rule, the standard bond wording provided, and still provides, that the obligee is “trustee” for the benefit of all beneficiaries/claimants. Significantly, the bond expressly states that the obligee is not obliged to do or take any act, action or proceeding against the surety on behalf of any of the claimants to enforce the provisions of the bond. It provides, however, that claimants may use the name of the obligee to sue on and enforce the provisions of the bond….The express negation of any requirement on the part of the trustee to take action on behalf of the beneficiaries, combined with the ability of claimants to sue in the name of the trustee support the conclusion that the trustee wording is used in the Bond in order to avoid the obstacle raised by the third party beneficiary rule.

The court noted that this issue had been addressed by the Ontario county court some 45 years ago in Dominion Bridge Co v Marla Construction Co, [1970] 3 OR 125. In that case, Judge Grossberg asked the following questions:

“I asked in argument: when did the duty arise? At what point of time? What exactly was that duty? Must Sun Oil embark upon inquiries who were the labourers? Who were the creditors? Who were the suppliers? Must Sun Oil seek out the creditors and suppliers? If the contention of counsel for the plaintiff be upheld, Sun Oil would be obliged to acquire knowledge of all materials purchased, all labourers on the job from day to day and to keep a constant surveillance. The consequence of the submission must be that Sun Oil must seek out material, men, suppliers, labourers, subcontractors, etc., of Marla and acquaint each that there was a bond in existence. No such duty is imposed by the bond itself…”

In the Valard case, the court concluded that “the sole purpose of the trust wording in the Bond is to address the difficulties that the identities of the claimants cannot be ascertained at the time the bond is entered into, and that the third party beneficiary rule would otherwise prevent a claimant from suing the surety.”

The application judge was not impressed with the equities of the situation from the standpoint of Valard, the sub-subcontractor. He said:

“In any event, a simple standard inquiry by Valard would be a more reliable means of obtaining the information. While it may be that employees of subcontractors may not always be aware of the possibility of a bond, this does not explain why a large and sophisticated entity such as Valard would not have in place a mandatory protocol under which bond information is requested on all subcontracts, especially given the state of the law on the issue. In this case, we are not dealing with the disadvantaged and infirm, but rather with a large sophisticated company with five or six hundred employees in Canada which has its own surety or bonding company.”

Accordingly, the court held that Bird had no duty to advise the sub-subcontractors of the bond.

Valard had originally sought relief from forfeiture in respect of its claim against the bonding company. But during the application, that claim was withdrawn since the bonding company was able to establish actual prejudice arising from the delay in making the claim.

Discussion

The court seems to have been heavily influenced by the long period of time since the Dominion Bridge case was decided and the apparent acceptance of that decision in the construction industry. Yet, this decision seems hard to reconcile with the trustee obligations which contractors assume when they require a payment bond to be obtained by the subcontractor.

Which is the greater burden: if there is a payment bond, for the contractor to find out which sub-subcontractors are beneficiaries of the bond and notify them of the bond; or for every sub-subcontractor on every construction project to ask whether there is a payment bond?

Even though the latter seems to be the more burdensome approach, it seems to be the law based on the Dominion Bridgeand Valard decisions.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 15, part 10

]]>http://www.constructionlawcanada.com/building-contracts/is-a-trustee-under-payment-bond-obliged-to-advise-potential-beneficiaries-of-the-existence-of-the-bond/feed/0Is A Pay When Paid Clause Applicable If The Contractor’s Account To The Owner Is Reduced For Reasons Unconnected With Subcontractor’s Work?http://www.constructionlawcanada.com/building-contracts/is-a-pay-when-paid-clause-applicable-if-the-contractors-account-to-the-owner-is-reduced-for-reasons-unconnected-with-subcontractors-work/
http://www.constructionlawcanada.com/building-contracts/is-a-pay-when-paid-clause-applicable-if-the-contractors-account-to-the-owner-is-reduced-for-reasons-unconnected-with-subcontractors-work/#commentsMon, 20 Apr 2015 13:42:03 +0000http://www.constructionlawcanada.com/?p=1674A pay when paid clause is one of the most contentious clauses in a building contract. Indeed, the clause is outlawed in most circumstances in the United Kingdom and some states of the United States. In Canada, there is conflicting case law about the application and interpretation of the clause. In Wallwin Electric Services Inc. v. Tasis Contractors Inc., the Ontario Superior court recently gave guidance as to when such a clause is applicable, and held that it does not apply if the contractor voluntarily reduces its account to the owner for reasons unconnected to the subcontractor’s work.

Background

A pay when pay clause purports to entitle the contractor to refuse payment to the subcontractor if the contractor has not been paid by the owner. In the Wallwin case, the payment clause read as follows:

“(3) Provided that, as a condition precedent, the contractor has been paid the certificate, in which such amount has been included, by the owner.”

The contractor, Tasis said that it had no obligation to pay the subcontractor since it, the contractor, had not been fully paid by the owner. The main contract had been certified to be substantially completed. There were no outstanding deficiencies with respect to the electrical work done by Wallwin and its work was included in the certificates that had been issued by the consultant.

The owner asserted that there were deficiencies in previously certified work. Accordingly, the contractor Tasis subtracted $150,176.65 from its invoice for these deficiencies. That work was unrelated to the work performed by Wallwin. Tasis was paid for this invoice.

As the judgment in the case recorded, the parties were agreed that

“1. Wallwin made regular applications for payment as provided for in the subcontract.

At no time did Tasis or the project consultant make any changes to the amount of Wallwin’s applications for payment.

At no time did Tasis or the project consultant give notice to Wallwin of any changes to the amount of Wallwin’s applications for payment.

Tasis was paid by the owner for each certificate in the amount certified.”

Nevertheless the contractor Tasis submitted that “the subcontractors legal entitlement to payment is contingent upon the general contractor being paid, then the subcontractor must bear the risk of nonpayment by the owner to the general contractor; the only exception being where the reason for nonpayment by the owner is the default of the general contractor.”

Decision of the Ontario Superior Court

The application judge disagreed. He held that the proper interpretation of a “pay when paid clause is as follows:

“A contractor is obliged to pay a subcontractor when:

the subcontractor makes application for payment,

neither the contractor or certifier have given written notice to the subcontractor of a change in the amount the subcontractor has applied to be paid

the amount the subcontractor has applied to be paid has been included in a Certificate for Payment, and

the contractor has been paid that Certificate for Payment by the owner.”

In particular, the court held that a contractor cannot:

“avoid its obligation to pay a subcontractor by adjusting an invoice to allow for an owner to retain contract funds when a dispute arises over previously certified payments. The certification process creates the obligation to pay. Disagreements over subcontractor applications for payment may be resolved prior to Certificate for Payment being issued, as contemplated at the end of Article 4.2, or they may be resolved after payment, but once the above conditions have been satisfied payment must be made.”

Accordingly, the court held that the subcontractor was entitled to be paid by the contractor.

Discussion

This case is, perhaps, an easy one. It is hard to contemplate that a “pay when paid” clause could be interpreted to apply if the money held back by the owner is not in relation to the work undertaken by the subcontractor and the contractor has been paid in full for that work. The more difficult cases arise when the contractor is unpaid for all or part of the work done by the subcontractor because of, say, the owner’s insolvency or faulty work by the contractor.

The present decision is interesting because it introduces two ingredients into the application of the “pay when paid” clause:

whether there has been a written notice of change in the subcontract and

whether the consultant has certified the payments due under the subcontract.

These ingredients appear to introduce two new hurdles that the subcontractor must get over before payment will be paid. It is unclear where those ingredients come from.

The Canadian law relating to “pay when paid” clauses is complicated by the conflicting decisions of the Ontario Court of Appeal in Timbro Developments v. Grimsby Diesel Motors Inc. (where the clause was applied) and the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v. Alta Surety Co. (where the clause was not applied). Until the law is clarified by the Supreme Court of Canada, the proper scope and application of “pay when paid” clauses will be contentious.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 6, part 2(d)(i)